The No-Cost Refinancing Myth – A Rebuttal

Over the last 13 years, I’ve refinanced several different mortgages seven or eight times using no-cost refinancing options.  With a traditional no-cost refinance, you take a loan with an interest rate slightly above the current market rate.  In exchange for taking a rate 1/8th to 1/4th higher than you could get in the market at zero points, the lender pays for your closing costs.

No-cost refinance options are not available in every state because related real estate taxes differ between states and the funds generated from taking a slightly higher rate can’t always off-set the taxes and other fees in states with relatively high real estate taxes.  Recently I was talking with someone in another state about no-cost refinancing options and I did a quick Internet search to see if this particular state had no-cost options readily available.

In doing my search I came across this “column” by Mark Greene. In the article, Greene writes, “again, this may feel like “no costs” were incurred, but the consumer pays in the form of a higher interest rate and more interest paid over time.”  But in this statement Greene is caught by an important fallacy. The interest rate and subsequent interest paid over time is only higher if one is perfectly clairvoyant and can time the bottom of interest rates perfect.  We can’t.  The probability that we refinance at exactly the bottom in interest rates is nil.  As a result, a no-cost refinance allows one to follow interest rates as they move lower without incurring closing costs each time.  Sure, you’ll miss the bottom by 1/8th of a point by definition, but again the chance you will foresee the bottom is practically zero.  Using no-cost refinancing allows you to follow rates lower and get much closer to the lull than others who opt to buy closing costs.